Charlie Rose Interview With Buffett

[scorpioncapital]

"WARREN BUFFETT:  If they wanted to reproduce the Burlington Northern

Santa Fe, it might take $100 billion or so.  "

 

Not sure but this sounds like Buffet believes his purchase price of around $25-$30 billion is 1/4 to 1/3 of intrinsic value.

[dcollon]

I think the BNI transaction fits exactly with the kind of returns that Buffett is focused on now and has told everyone he is focused on.  He was able to put a ton of money to work that he most likely feels will generate pre-tax returns on capital in the high single digits or low double digits at best.  If you add in the potential benefit of using float he would increase his returns by a couple percent over time. 

 

This deal isn't appealing to me from an investment standpoint, but then again I don't have a lot of capital (unfortunately) that needs to find a home.  I think the error people continue to make is looking at what Buffett is buying and not understanding why he is buying it.

 

[uncommonprofits]

BNI pays 500 million in dividends. I think of it as the excess cash thrown out by BNI. Also, BNI has been spending few hundred million dollars every year to buy back stock.

 

I agree ... BNI does not need to hold back all it's cash flows to fund it's business.  They need some of it (perhaps 60% currently) ... but not all of it.  The other thing to realize is that BNI is going through a major Capital Expenditure phase at the moment --- the differencial between Depreciation/Amortization and Cap Exp over the last few years has been $800-$900 million ++.  But this will not go on forever .... depreciation and capital expenditures will eventually merge .... and as that starts to happen you will see the percentage of 'free' cash flow rise faster than the percentage increases in profits reported.   Note - there have already been some pretty significant increases in dividends over the last several years.

 

The one thing I do agree with Sanjeev on though is that as small investors .... we have the luxury of seeking out tremendously smaller (and unknown??) ideas than either BNI or BRK.  I do though continue to hold Ingersoll Rand as a large cap staple in my portfolio and am quite glad that BRK did not go after this one instead.  IR is integrating the Trane acquisition well --- there are a lot of synergies (also some inventory/working Cap balance sheet recoveries).  I figure IR should generate close to $4/share in free cash during this most weak economic year.  They will also be better structured for the next downturn.  In a recent presentation, IR mentions that with the recent transitioning of the company -- it is pretty much set up for the next 100 years.  At some point, BRK might take a run at this one also -- but hopefully not for some time to come.  IR is a play on energy prices, China/India and even what is starting to happen in wireless.... it's also a play on global warming (should it happen ... but they have global cooling covered as well).

 

UCP / DD

 

[twacowfca]

BNI's ROA doesn't look that great, but BRK's doesn't either.

WEB doesn't care much about GAAP earnings. He likes things

where potential earnings can just as well show up as

conservatively reserved float instead. BNI is like this too.

Their FCF going forward should be a lot more than GAAP

earnings and increasing at double digits in 2010 and beyond.

[tooskinneejs]

The other thing to realize is that BNI is going through a major Capital Expenditure phase at the moment --- the differencial between Depreciation/Amortization and Cap Exp over the last few years has been $800-$900 million ++.  But this will not go on forever .... depreciation and capital expenditures will eventually merge

 

UCP - I encourage you look into the effect that very long useful lives have on reported amounts of depreciation expense (e.g., current depreciation expense on an asset class with a 35 year useful life is comprised of 1/35 depreciation on a capital expenditure from 35 years ago [when things cost a lot less], 1/35 depreciation on an expenditure from 34 years ago, etc.), how that may affect the comparison of current cap ex and depreciation expense, and whether one should really ever expect one amount to "merge" with the other.

[Guest dealraker]

Return on Equity for Berkshire?  That's a meaninless statistic.  Suppose you had owned Wesco during the years it owned Fannie Mae stock.  Fannie Mae stock was marching upwards year after year and book value per share was enriching shareholders.  What was the return on equity for Wesco?  Close to zero.  If you are a Berkshire or a Wesco and a large part of the business is owning stocks in other corporations that only pay out a small fraction of their earnings in dividends, you have no income and thus no so-called "return on equity."

 

Over and over again in my investment club I have this guy who is always bringing up Berkshire's poor return on equity.  I tell him the above and he replies: "Berkshire has a low return on equity.  Why do we own a stock with low returns?"  Our portfolio is down from 10 years ago while our Berkshire stock has more than doubled (we bought it in about 1998 at $37,000 per share).  Makes no difference to him as Berkshire has a low return on equity.

 

He has no ears and evidently I have no persuasion abilities towards enlightening him.

 

[Guest Bronco]

I thought BNI generates approximately $1B of FCF per year.  That should go to Papa Warren.  

 

I agree with one poster that said BNI is a lot like Mid-American.  Capital Intensive, but still FCF generator.  

 

Like it or not, this is the future of BRK.  Utilities, Railroads, Pipelines...(and of course, insurance).

[Guest dealraker]

The "od days" were much more fun.  Investors back in the early 90's -- that is before they sold all their possessions and bought tech stocks--- would simply take a brand name stock like Coke and project free cash flow growth at 15-18% for 50 years.  Then they'd throw in a discount rate of 8% or so and come up with a $300 per share valuation for the stock.  But that game blew up so they went all Cisco, EMC, and Intel--- until that blew up.

 

Now we are trudging along buying Burlington Northern for 18 times depressed earnings and thinking we are overpaying?  Geez, I don't think so.

[uncommonprofits]

The other thing to realize is that BNI is going through a major Capital Expenditure phase at the moment --- the differencial between Depreciation/Amortization and Cap Exp over the last few years has been $800-$900 million ++.  But this will not go on forever .... depreciation and capital expenditures will eventually merge

 

UCP - I encourage you look into the effect that very long useful lives have on reported amounts of depreciation expense (e.g., current depreciation expense on an asset class with a 35 year useful life is comprised of 1/35 depreciation on a capital expenditure from 35 years ago [when things cost a lot less], 1/35 depreciation on an expenditure from 34 years ago, etc.), how that may affect the comparison of current cap ex and depreciation expense, and whether one should really ever expect one amount to "merge" with the other.

 

OK ... point taken.... provided volumes increase in the future as aticipated by BNI .... then you are quite right Depreciation and Amortization will Not converge..... my mistake.  However, one of the concerns mentioned here was 'what if' America falls flat ... where then is the 'margin of safety'?  In such a case, BNI's volumes would also fall short ...... therefore the average railway asset will outlast the useful life.  The useful life of anything increases with less than predicted useage.  BNI's capital expenditures of today have factored in a certain amount of future volume growth.  If that growth does not pan out -- then the capital expenditures of tomorrow are going to decrease (on an inflation adjusted basis) at some point.   A bridge that is forecasted to last 35 years based on increasing volumes of 2-3% annually ...... could potentially last 40-50 years if (upon year 34) volumes had only averaged 1-1.5% annually.

 

UCP / DD  

 

 

[shalab]

Also, Gieco has its own CIO, Lou Simpson who does the capital allocation. Not sure if excess cash goes back to Buffett to allocate.

 

cheers!

Shalab